Category: economists

The bear crying wolf

A perennially bearish hedge fund manager with an Austrian economics bent recently appeared as a guest on the Tom Woods Show.  Tom Woods opened the discussion with:

What do you say to somebody who says, “The trouble with you Austrian-influenced financial guys is that you’re always bearish, so of course you’re going to be right when things go wrong.  Why should I listen to you now?”

Great question.  Are we Austrians eventually right, but always early?  Is this one “big, fat, ugly bubble” that, when it bursts, will vindicate all of us?  Are we just flat wrong?  Is Austrian Business Cycle Theory (ABCT) out of touch with reality?  Or are we stopped clocks, right twice a day, but miss out on a lot of opportunities the rest of the time?

For the full article by Kevin Duffy, see here.

Split personalities of the political class and their apologists

“Dissociative identity disorder (previously known as multiple personality disorder) is a severe form of dissociation, a mental process, which produces a lack of connection in a person’s thoughts, memories, feelings, actions, or sense of identity.”

Exhibit A: Whenever the Left or Right wing of the political class is out of power they sound fiscally responsible. In power, they tax, spend, and inflate like madmen.

Exhibit B: Economists who cook up hair-brained theories to justify economically destructive policies can be just as guilty.

Student Benjamin Lee recently posted an article on Mises Daily about Nobel Prize winning economist Paul Krugman’s “identity crisis.” Seems Krugman was critical of the Bush/Greenspan policies of running up deficits, printing money, and ignoring entitlement time bombs back in a 2003 article titled, “A Fiscal Train Wreck.” Writes Lee:

If Paul Krugman was worried about a $3 trillion budget deficit and a debt-to-GDP ratio of 4 percent six years ago, a $9 trillion budget deficit and a debt-to-GDP ratio of 40 percent today should have him preparing for financial Armageddon. (My note: Lee likely meant “deficit-to-GDP,” “debt-to-GDP.”)

Lee continues:

The Paul Krugman of 2009 completely disagrees with the Paul Krugman of 2003.

The key message is that in 2003, Mr. Krugman wrote a great article with an incredibly accurate picture of the financial health of the United States at the time. There is no question that George W. Bush was the worst president we ever had. There is also no question that Alan Greenspan was the worst Federal Reserve Chairman we ever had.

The problem is that everything Mr. Krugman now writes entirely contradicts his 2003 article, despite the fact that every fundamental problem the economy faced six years ago is now much worse. Mr. Krugman has no issues with Barack Obama and Ben Bernanke committing the same atrocities the previous administration committed. President Obama has ramped up every budget, including the military budget, while Bernanke runs the presses faster than Greenspan ever did.

My comment: So much for Obama’s “change.” We should keep Dissociative Identity Disorder in mind next time there is a change in power, likely 2012. The Right is just as susceptible to this disease as the Left, if not more so.

Be careful what you wish for

In August, 2002, nineteen months into Alan Greenspan’s experiment in easing credit to contain the fallout from a bursting tech bubble, a New York Times columnist and so-called economist weighed in with this bit of wishful thinking:

The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Although the Maestro was optimistic, our economic guru had his doubts:

Despite the bad news, most commentators, like Mr. Greenspan, remain optimistic. Should you be reassured?

[W]ishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it’s a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn’t realistic unless the story line makes sense.

If you haven’t guessed, our opinion writer was Paul Krugman and he managed to get it wrong on two counts. First, the Greenspan medicine was successful in stimulating consumption and blowing a housing bubble for the ages. Second, Krugman’s recommended cure ended up being much worse than the disease.

Has Mr. Krugman (and Messrs. McCulley and Greenspan for that matter) faded into oblivion for his fatal advice? Not exactly. Last October, in the depths of a stock market collapse he failed to forecast, Paul Krugman received the Nobel Prize in Economics. (The award is given by Sweden’s central bank and by coincidence Krugman is a long-time supporter of fiat money.)

Krugman’s modus operandi is simple: during the bust always advocate “stimulus” in the form of government spending and cheap credit via the Fed. When the artificial boom arrives, take credit and assume it rests on a solid foundation. When the fake boom inevitably turns to bust, blame it on lax regulation and “greed.”

On March 20 of this year, Krugman cheered the Fed’s herculean attempts to inflate at any cost:

In effect, [the Fed’s] printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so! The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.

Memo to all interventionists and inflationists: Be careful what you wish for.

Memo to fellow contrarians: When the bubble blowers and their apologists are still employed and appearing in the Mainstream Media, the secular bear market remains in its early stages.

Slouching towards depression: The advice of the great Austrian economists goes unheeded

The three most prominent Austrian economists were clear on the correct policy response to an economic crisis – non-intervention:

The appearance of periodically recurring economic crises is the necessary consequence of repeatedly renewed attempts to reduce the “natural” rates of interest on the market by means of banking policy. The crises will never disappear so long as men have not learned to avoid such pump-priming, because an artificially stimulated boom must inevitably lead to crisis and depression… All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices different from those the market indicates.

~ Ludwig von Mises, The Causes of the Economic Crisis (1931)

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion….

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end…. It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

~ Friedrich Hayek, Prices and Production and Other Works (1932)

So now we see, at last, that the business cycle is brought about,
not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play… what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, “laissez-faire” policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue. The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.

~ Murray Rothbard, “Economic Depressions: Their Cause and Cure,” 1969

Sadly, the political class, mainstream media, investor class, and a variety of economic charlatans failed to get the memo. Continuing to pursue the current course of relentless and audacious interventions virtually guarantees depression. Mises, Hayek, and Rothbard must be rolling in their graves. Will we ever learn?

Economists drinking the Bernanke Kool-Aid

A monthly forecasting survey showed the vast majority of economists giddy over Bernanke’s recent rate cuts:

The economists overwhelmingly approved of the Fed’s decision on Sept. 18 to cut the target for the federal-funds rate by a larger-than-expected half percentage point. Seventy-six percent said the move was appropriate, compared with just 22% who thought it was too aggressive. Just one economist felt that the cut wasn’t aggressive enough. That contrasts with a recent, but unscientific, reader poll in which 60% of respondents said the Fed action too aggressive.

Indeed, confidence in the central bank was reflected in the economists’ average grade for Ben Bernanke. In the wake of the interest-rate cut, the Fed chairman scored 90 out of 100, the highest mark he has received in the survey since his tenure began.

They also gave high marks to the ECB:

European Central Bank President Jean-Claude Trichet, who was the first to respond to the credit crisis by injecting liquidity into markets in August after BNP Paribas froze three of its asset-backed securities funds, also received a score of 90. Meanwhile, Bank of England Governor Mervyn King didn’t fare quite so well, scoring a 78 with the economists. Mr. King largely stood on the sidelines while the Fed and ECB were pumping liquidity into markets, only stepping in following a bank run on Northern Rock PLC triggered by the midsize U.K. lender’s credit problems.

Faith in the Fed, circa 2007:

“Some of the uncertainties have faded, partly due to the fact that the Fed moved more aggressively,” said Lou Crandall, chief economist at Wrightson ICAP. “The Fed’s willingness to pull out all the stops played a role in bolstering the economy.”

Faith in the Fed, circa 1929:

“It may be well again to stress the all-important point that the Federal Reserve has it in its power to change interest rates downward any time it sees fit to do so and thus to stimulate business.”- Financial World, April 10, 1929

My comment: The only thing we learn from history is that we never seem to learn from history.

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